Lotte Chemical Corporation (A011170) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. I am Young Kyung Hwang, Head of IR at LOTTE Chemical. Thank you for taking the time out of your busy schedules to join us for LOTTE Chemical's earnings conference call. On today's conference call, we will first provide a brief overview of our financial results for the second quarter of 2026. This will be followed by remarks from our CFO on key management issues, after which we will proceed to a Q&A session. Please note that simultaneous interpretation will be provided during the presentation, while consecutive interpretation will be provided for the Q&A. Today's presentation materials are available for download from our website. Let me now introduce the executives joining us on today's earnings call. Joining us today are Nak-Seon Sung, CFO; Min-Woo Kim, CSO; Giseop Kwak, Head of the Corporate Planning Division for the Basic Chemicals; Yoon-Seok Kim, Head of Sales; and Kyung-Sun Park, Head of Corporate Planning Division for Advanced Materials. Next, let me walk you through our business performance for the second quarter. Please turn to Page 2 for our consolidated second quarter financial results. Revenue for the second quarter of 2026 was KRW 5,689.4 billion while operating profit came in at KRW 110.1 billion, posting an improvement Q-o-Q. In Q2, the product spread of key business areas widened, leading to improved profitability over the previous quarter. EBITDA came in at KRW 458.1 billion. Profit before tax and net income were KRW 242.4 billion and KRW 194.4 billion, respectively. Pretax profit improved significantly over the first quarter due to the increase in gains on equity method valuation on the back of earnings recovery of the major subsidiaries as well as the impacts from the valuation gains on derivatives owing to the changes in the FX rate. Next is the consolidated financial position. As of the end of the second quarter of 2026, total assets stood at KRW 32.8 trillion, total liabilities at KRW 14.2 trillion and total equity at KRW 18.5 trillion, and the debt-to-equity ratio posted 76.8%, similar to last quarter. Next is performance outlook by business. First, Basic Chemicals. In Q2 2026, Basic Chemicals' business recorded revenue of KRW 3.9403 trillion, operating profit of KRW 2.3 billion and operating margin of 0.1%. Profitability in Q2 declined Q-o-Q despite improved spreads for key products due to scheduled maintenance and the lagging effect from feedstock price volatility. In Q3, as global demand recovery continues to lag, increased volatility in raw material prices is likely to prolong market uncertainty as well. Next, Advanced Materials. In Q2 2026, revenue was KRW 1.1551 trillion, operating profit, KRW 132.5 billion and operating margin, 11.5%. Profitability improved significantly Q-o-Q due to wider spreads for key products and the FX effect. In Q3, product spreads are expected to slightly narrow Q-o-Q due to the softening of the spread improvement stemming from rising raw material prices that were captured in Q2. Despite that, based on the high value-add product portfolio, we believe that we will be able to maintain our solid profitability. Next, LOTTE Fine Chemicals. The details were shared in the earnings release on July 30, so I will only go through the highlights. Revenue in Q2 was KRW 586.3 billion, and operating profit was KRW 61.9 billion with operating profit margin of 10.6%. Results improved Q-o-Q, thanks to higher international prices for major products, increased sales volume and exchange rate effect. In Q3, with upstream industries remaining flat, downward pressure on major products prices is expected to continue, but solid profitability is expected to continue as well. Last, LOTTE Energy Materials. Again, details were already covered yesterday at the earnings conference call, so I will only run through the highlights. Revenue in Q3 was KRW 194.2 billion, and operating loss was KRW 16.9 billion. Although Q2 sales volume increased, profitability declined as the positive lagging effect reflected in the previous quarter were eliminated. In Q3, sales volume is expected to rise with expanding demand for AI and ESS, and we plan to meet growing customer demand and strengthen our growth foundation through the ramp-up of a new overseas plant. That concludes the Q2 2026 results presentation. I will now hand over to our CFO, Nak-Seon Sung, who will discuss our results and key management issues.

[ Interpreted ] Good afternoon. This is Nak-Seon Sung, Head of Finance at LOTTE Chemical. I thank the investors and shareholders who joined our Q2 2026 earnings conference call despite your busy schedule. I will briefly review our financial performance. Geopolitical issues in the Middle East continued to create global supply chain uncertainty this quarter, leading to increased volatility in raw material and product prices and a challenging business environment. In this environment, we optimized operations with a focus on profitability. There was some favorable feedstock lagging effect and based on the feedstock competitiveness of our U.S. ethane cracker business and improved results in Advanced Materials and Fine Chemicals, we maintained profitability on a consolidated basis for a second consecutive quarter. Given that domestic and external volatility is likely to continue, we will further strengthen our ability to respond to market changes and maintain profitability-focused operations. Despite the difficult environment, we are steadily moving ahead with strategies to reinforce our fundamental competitiveness and build a medium- to long-term growth foundation. First, we are actively participating in the government-led petrochemical industry restructuring to solidify fundamental competitiveness of our Basic Chemicals business. In Daesan, the spin-off procedure was completed in June, and the integrated company with Hyundai Chemical will be launched in September to begin full scale integrated operations. Yeosu received government approval for its restructuring plan, and we will proceed with splitting off of the Yeosu plant and establishing an integrated operating system with Yeochun NCC. These integrated operations are expected to improve operational efficiency and product portfolio synergy and to gradually strengthen financial soundness through asset and capital structure optimization. Through the restructuring, we will heighten competitiveness of our Basic Chemicals business, while reducing its relative share and build a more balanced portfolio by fostering high-value businesses in Advanced Materials and Fine Chemicals. For longer-term growth, in Advanced Materials, we are moving ahead with the Yeochun compounding project on schedule to expand functional and high-value businesses, targeting completion and commercial operation within the year. This will help enhance our compounding production capabilities and to continue increasing the share of high-value specialty products such as Super Engineering Plastics. In Fine Chemicals, we continue to invest in and develop technologies for high-growth, high-value materials like semiconductor and medical-grade materials. We are also expanding capacity for TMAH, a precursor for semiconductor developers to actively respond to growth in the semiconductor materials market. Along with such portfolio upgrade, we are keeping up our work to improve our balance sheet through investment optimization and cash flow focused management. With the completion of our longstanding large investment projects, future investment levels will be managed at a more stable pace, and we expect to run our finances based on the principle of keeping investment within EBITDA. We will consistently maintain selective investment that considers growth and profitability and to keep conservative financial management. To our investors and shareholders, while uncertainties persist around the petrochemical industry, we remain unwavering in our push to strengthen competitiveness through restructuring, upgrade our portfolio towards higher-value businesses, nurture future growth areas and improve our financial structure. We will continue to respond flexibly to market changes, build a sustainable growth foundation and enhance corporate value. As always, we will do our utmost to meet your expectations and trust. Thank you.

[ Interpreted ] [Operator Instructions] The first question will be provided by YeongSu Shin from Shinyoung Securities.

[ Interpreted ] I have 2 questions. The first is the outlook for the second half. So for the Basic Chemicals and the Advanced Materials, can you give us an outlook for the second half going forward? And my second question has to do with what has been reflected in this quarter. So in terms of the inventory valuation gains and losses, what has been reflected? And also other one-off items that has been reflected, if you can share those information.

[ Interpreted ] So this is Seon-Nak Sung, the CFO. Let me take your question about the outlook for the second half. So in the case of the Basic Chemicals, we believe that the tight supply situation and also the strong prices that we have seen in the first half will be somewhat eased. And also going into the second half, the feedstock prices changes and also the supply of new volumes will have an impact. Also, we will sequentially reflect the changes in the consolidated earnings structure in line with the business restructuring of the domestic industry. In the case of Advanced Materials, we have been managing our pricing very flexibly and also the spreads have improved. And so this was reflected in the performance. Going into the second half, we believe that the major factors that will be affecting the performance of these businesses will be the recovery of demand of the downstream business, as well as the economic recovery trends. And also, we will be focusing on our strategic customers and also pursue further expansion of our high value-added products.

[ Interpreted ] This is Giseop Kwak, the Head of Corporate Planning for the Basic Chemicals. So let me take your question about the second quarter inventory asset valuation losses and also the one-off losses pertaining to the T&I. In the case of the Basic Chemicals, there were losses related to the valuation of inventory was recognized in the second quarter and the losses came to KRW 100 billion. The main reasons was owing to the impact of the Middle East war. In the second quarter, the naphtha prices rose in the month of April to May and then it sharply decreased in the month of June. And accordingly, the sales prices also fell, and this led to increased losses for the valuation of inventory in the month of June. In the case of the Malaysian business and our Indonesian business as well, they have business structures that are based on naphtha. And so they are impacted by fluctuations in the feedstock prices. So due to reasons similar to Basic Chemicals in the second quarter, losses -- similar level of losses related to valuation of inventory occurred. Next, I'm going to talk about the impact on the earnings by the T&A (sic) [ T&I ]in the Yeochun NCC. LOTTE Chemical undertook in the first half our scheduled T&1 for the Yeosu plant with the aim of ensuring the reliability of our facilities and long-term safe and stable operation. In order to enhance the efficiency of our measures to respond to the risk arising for -- from the Middle East conflict on our supply chain, compared to our original schedule, we undertook the T&I earlier than the original plan and the feedstock that was secured during the T&I period was utilized in the operation of other facilities, thus maintaining production stability. Also during the T&I period, we have given prior notice to our customers, and we have engaged in consultations with our customers regarding the reduction in the production volume during this period. And so we have responded in a way that ensured that there was no disruption in the supply of our products to the customers. During the T&I period, there was a reduction of the production and sales volume and also due to the delay in the schedule for restarting, around KRW 50 billion of one-off losses had occurred. Going into the second half, with the completion of the turnaround, we are looking forward to positive impact, including increase in the production efficiency. This is all. Thank you.

The following question will be presented by Parsley Ong from JPMorgan.

So can I clarify, earlier you mentioned, I think, KRW 100 billion inventory loss in Basic Chemicals and KRW 200 billion inventory loss in Titan in second quarter. So total KRW 300 billion inventory loss. Then despite that, you got KRW 110 billion OP in 2Q. So can you help me quantify how much was the positive impact from feedstock lag so that we can get a sense of how much of your second quarter earnings was core recurring earnings versus one-off caused by the oil price volatility? And the second question is now that your Daesan restructuring is completed, if we -- could you just tell us or share with us the expected impact on your OP versus equity method income? For example, if we use the second quarter earnings as an example, then theoretically, going into third quarter, how much would your OP and equity method income change by?

[Interpreted] This is the CFO, Sung Nak-Seon. Let me take your second question first. So the restructuring of the Daesan business is quite significant, not only in terms of enhancing our business competitiveness, but also in improving our financial structure as well. In the case of the restructuring of the Daesan business already in terms of bonds, KRW 1.6 trillion has been completely transferred. In the case of the Yeosu business restructuring as well as we progress with the development process, the borrowings will be transferred. And as such, the financial structure will undergo additional improvement. As of the end of 2025 on a separate basis, the debt-to-equity ratio stood at mid-60% range. And so when the restructuring is completely completed, we believe that the debt ratio will come down even further. When the business restructuring at the Daesan side is completed in terms of our earnings, we expect that the business portfolio will become more efficient, thus leading to less losses and improvement of our profitability. And also because the share of the Basic Chemicals will go down, our expectation is that the volatility of the earnings owing to market condition change will also be eased. And finally, compared to the second quarter, the gains and losses on equity method into the third quarter because of the completion of the restructuring of the Daesan plant, we believe this will be improved.

[Interpreted] So this is Kwak Giseop, the Head of Corporate Planning of the Basic Chemicals. So let me take your first question about the inventory as well as the feedstock issues. In the case of Basic Chemicals division as well as Titan, each of the businesses saw the losses on inventory valuation of KRW 100 billion each in Q1. In the case of the lagging effect, because of the war in the Middle East, in the case of the month of April in the second quarter, there was positive lagging effect. But in the case of May and June, because of the fall in the feedstock prices, the reverse lagging effect occurred. The size of the total reverse lagging effect is at a level that is similar to the losses that we have incurred in terms of the inventory valuation.

[Interpreted] The following question will be presented by Woo-Je from KB Securities.